When I was 15 years old I had a paper route and, with no expenses and no girlfriend, I saved virtually every dime I made. At that same time, I became interested in stocks and investing. Now, I had no clue how stock investing worked and my parents, born 8 years after the Great Depression, viewed the stock market in roughly the same terms as a casino. What if the ball doesn’t land on black? You’ll lose it all. Now, today, one could simply Google “how to buy stock” and educate yourself in a matter of minutes. In 1979, though, one could only read the stock quotes in the newspaper and wonder what all those numbers meant while dreaming of the great wealth one must have if you were a stock investor.
Despite my utter lack of stock knowledge, I wanted to enter that world that I envisioned as a place where the wealthy were. So, I asked my parents if I could invest my life savings in IBM. My parents, probably a bit frightened by this prospect and, being wise enough to know that most children will move on to something else if made to wait for awhile, told me I could purchase IBM stock when I had $1,000. Well, much to their surprise, I met and surpassed that $1,000 goal in a matter of months and by early 1980 was ready to roll. Only, my parents had been right and I moved on to something else – probably basketball.
Recently I had this conversation with my 15-year old son, also a born saver, and we both started dreaming of what ginormous wealth I would have if I had only pursued that simple, $1,000 investment in early 1980. Would I be living in some super-mansion with a car elevator? Would I have a 4th home on Lake Como in Italy? So, out of curiosity, I Googled it. If I had invested $1,000 in IBM stock on January 1, 1980 and, reinvesting dividends but not investing any more, the value today would be worth…..$14,627.35. A nice sum, no doubt. A 7.5% compounded annual return even – very nice. But, let’s face it, not even enough to buy a new Honda Civic.
I have to admit, the result baffled me a bit and, at first, I wondered if it was just because IBM stock hadn’t done well in recent years. But, no, that 7.5% average annual return is quite healthy.
Finally, the real answer smacked me in the face like a copy of The Millionaire Next Door. Byars, I reminded myself, remember how wealth is created for us real people. Not with one super investment that pays off like a bet at the craps table. No, wealth is created by following some simple guidelines and sticking to them for years. These are based loosely on what Stanley and Danko found through their research and partly on my own experience:
• Believe that financial independence is more important than displaying high social status;
• Have a financial plan to help you achieve your goals;
• Live beneath your means;
• Save your dollars and invest them for the future;
• Make sure your investment portfolio is diversified and supports your financial plan and your goals;
• Stanley and Danko found their “normal” wealthy people did not rely on income from their parents – even if they thought they would inherit a lot, they live as if they won’t;
• Get good, professional advice from someone who is compensated solely by helping you achieve your goals and is required by law to act solely in your best interest.
I will write about each of these individually in future blog posts.
Steve provides this educational blog for free, if you want to learn more about him and Moneywatch Advisors, email him at Steve@Moneywatchadvisors.com.